The Streak Down Under

had an unblemished record of calling elections correctly. In fact, the result was considered such a sure thing that some bookmakers had already paid out to people betting on Labor to win. In a few minutes, I'll be asking our in house Australia experts whether there are any lessons here for other embattled governments around the world. I'll also have a word with FED reporter Chris Condon about the US

Central Banks search for a new policy framework. But first we asked Australia Economy report to Chris Burke to explain why the economic recovery down Under has also been defying the odds. This has been an extraordinary day in the Soviet Union, where Mikhail Gorbachob has been ousted from power in what appears to have been a bloodless cool Terminator

to Judgment Day. It's one of the new summer movies we'll be reviewing this week on Cisco and ebrit Home videotape of Los Angeles police beating Rodney King on indications here at the Pentagon that this war may maybe beginning right now and that the president may be going on the year the US goes to war with Iraq after Saddam Hussein in dades Kuwait, Vanilla Ice tops the music charts and the developed world's longest uninterrupted economic expansion begins

down Under. For almost twenty eight straight years, Australia has enjoyed steady economic growth without a recession. Not in two thousand and one, where the tech bubble disrupted the US economy, not in two thousand and eight, when the global financial crisis infected much of the world. Here in Australia, the economy has just kept on growing. But that streak now looks to be in real danger of coming to an end. It's all because a tumbling housing market is having some

painful side effects. The slump is weighing heavily on household spending and inflation in an economy that's already sharply slowed and where consumption makes up almost six of GDP. Indeed, Australians long held fear of a failing economy was on stark display just last weekend in the country's shock election result. While polls showed a change of government was all but certain, in the end, Ozzies just couldn't bring themselves to do it.

Prime Minister Scott Morrison managed to convince voters that their economic prosperity would suffer if the Labor opposition one office. Australians are particularly nervous right now. The house prices have lost eight since the peak after a five year property boom ended with a thud. But the worst has been seen in Sydney, the most populous city in the nation's economic powerhouse, where prices have sunk more than fourteen percent

from their peaks come through. I recently visited Wentworth Point, a suburb crammed with new apartment blocks about forty minutes northwest of central Sydney by train. I wanted to see just how gloomy things were in the housing market, so I arranged to meet real estate agent Alex Chittiac at an open house he was hosting for a three bedroom apartment on the side of the city's Paramatta River. The

numbers of people attending our homes drop theramatically. This was on the market, say two years ago, we were expected at least you know, ten groups come through on on a Saturday. UM. Now it's you know, we're averaging around three to four UM. A lot of that. All the reason for that excause the the fiance commissions. It's a lot of coupler now and then to borrow money. So some people have disappeared altogether. Seen the number of investors

drops on them. So this was this is currently owned by an investor UM and they're they're looking to get out, mainly because you know, they finding that finance Chinians are hard on. Australia is having its own version of the credit crunch. After bingeing on debt for five years to buy houses that were becoming more and more unaffordable, Australians were saddled with one of the highest household debt levels in the O e c D and their banks became the most exposed to housing in the world. But the

money has since dried up. In the last two years, a combination of regulatory curbs and a widespread probe into the financial industry that exposed lots of bad behavior has seen banks turn off the taps. Investors are now getting a frosty reception and owner occupiers are being more scrutinized than ever. I met anchored Shama and Rony Samanathan, a couple inspecting the open home, and Wentworth Point. The two young doctors were recently married and are searching for their

first time together. I asked them about the process of getting a home loan the upshot. If you like your Netflix, you might be in for a hard time. And are you finding that kind of a difficult process getting the homeland? Is it maybe taking it longer than you expected? Relying in January a long time, we just got a pre approved.

Was the kind of criteria much stronger than you expected? Yeah, I think it's stronger and more more strict with you know, what they consider is income and what they conder and how much we's been on Netflix and printing counts. Did actually ask your stuff like that? That forms with every detail of us, bending from sending out to holidays to any subscription subscriptions, insurance, any detail have got the credit card you know some reason? And they analyzed the credit card,

so we'd get the vacine. What was this expension? Australia's economy is presenting policy makers with something of a conundrum. The worst housing slump in the generation has played out amid a roaring hiring boom. Thousands of new jobs are being added each month, so by and large, most people are managing to meet their mortage repayments. And while annual GDP growth has slowed to two point three, that's still

only slightly low it's decade average. This may all provide some comfort for now, but the jobs boom is showing signs of weakening, and the unemployment rate has been creeping

back up. The Reserve Bank is worried that's going to see a further drag on household spending, and this week said it was considering cutting interest rates for the first time since you know, the thing that I think would really shift the balance of risks, as if we were staring down the barrel of a softer labor market over the course of two thousand and nine and two thousand and twenty, incomes growth will slow further, and it also brings, I guess into play the prospect of or selling in

the housing market. Which is not something we've had as I yet. Sally Old is JP Morgan's senior strategist for interest rates in Australia, one of many economists who reckon the Central Bank will be forced to cut rates twice this year to shore up the economy. So you recently changed your outlook for interest rates to what extent did the housing slump play a part in that decision? So housing played a role in the sense that it's clearly

having an impact on the consumer. We've been quite variosh on household consumption for a while now, and part of that was to do with the slowing in house prices, but more of it was just around some of these constraints on the balance sheet starting to to bind and make life a little bit difficult for Australian consumers. However, the property downturn plays out here, there seems to be a wide ranging consensus that it's going to be long

and painful. While prices aren't falling at the speed they were a few months ago, they're unlikely to return to their twenties seventeen peaks for years. Not only that, many of the investors who once fueled the apartment market have left town. Some of those investors were likely scared off by the long expected election of a labor government which planned to strip investors of lucrative Tact benefits. But that's not happening now and could offer buys some incentive to

return if they can get finance. That is, the Reserve Bank recently warned that a glut of Sydney apartments were a risk to the economy after eighty thou new units flooded the city in the past few years. In Wentworth Point alone, more than three thousand apartments are still waiting to be started or completed. I joined Alex, the estate agent on a quick tour of the area in a golf buggy that he uses to get around the large

estates of apartments. I like to say, you sure were, I'll take this golf buggy on the road we're registered. Are We're going to be stopped by the clogs. So just to give you an idea. So he on the right, it's a few development site resigns. There's towers up to twenty stories on that block. Who's going to buy them? It's hard to say. They haven't started selling them here. Who There's another development that was that we just passed that was on the market. Um, they have sales happened

wine as well as they hoped. So we're finding now that we've sort of pull things on the back burner and the projects being delayed. Um, I think it's until they start moving them again we will probably probably won't get off the grounds. If everything else in the world was a bit rosier, Australia's property slump might not be

such a threat to the economy on its own. Indeed, the Reserve Bank still thinks the correction is an orderly one, but the problem is that it's happening at a time when wage growth is still sluggish and global uncertainty abounds. Australia's economy is more exposed to China than any other in the developed world, with about a third of its exports going there, and the jury is still out on whether China can rebound from a recent soft patch amid

its ongoing trade dispute with the US. Add to that a big question mark hanging over global growth, and it's understandable why watches of the record breaking economy are a bit nervous. As a Kiwi who spent six years in their country, I can tell you that Ozzies are a pretty resilient lot. There is something to their age old mantrap of She'll be right, which basically means that whatever comes along won't be the end of the world. So have a beer in a barbie and enjoy the sunshine.

But if their record stretch of economic growth should come to an end, that complacency is going to be sorely tested. We also understand that he has to take the good with the band. You know that the good times weren't gonna last forever um and it's I guess it's just a you just got to deal with with what you had. So eventually I think we will see a turn, and when it does, you know will be here to make the most of them. I'm Chris Burke for Bloomberg News.

So that was a little bit on the miracle of the Australian economy and also the miracle of the election last week. Surprisingly, the reelection of the Conservative governments in Australia when nobody, literally no one expected them to win.

I'm sitting in a noisy newsroom now talking on the phone down the line to Tamara Henderson, who's our economist for Australia and indeed Southeast Asia and New Zealand UM for Bloomberg Economics and also Malcolm Scott are Managing editor for Asia on the news side, Malcolm, can I start with you? I mean, person you're sitting in Sydney. Were you shocked by the result on Sunday? I was surprised. I said to all my friends about a month ago.

The only way they can win this is by a relentless negative attack on what was a very big target. In a departure from the norm in Australia, the opposition Labor Party went to the electorate with a very detailed policy proposal, a whole bunch of tax initiatives, climate initiatives, a big redistribution plan moving income from older generation to the younger generation. And it was a huge target and a backfired. The Liberal Party and the National Party attacked

the policies. They attacked the climate policies in the seats where jobs were at stake from them and it worked well. It reminds me actually, it's funny because we've got rather used to election upsets, you know, the surprise of Brexit vote,

the surprise of the Trump election. But the big one that was in my sort of early in my life was in the UK, and it's the way you're describing it was kind of similar that after many years of Conservative government, Labor was expected to win and they were extremely confident, and on the back of that had a very detailed plan which even included raising taxes on a certain chunk of the electorate, the people on hire incomes, and that was credited afterwards as the reason why they

had that. The Conservatives actually got reelected against everyone's expectation, and then nobody ever ran in Britain on a campaign promising to raise anybody's taxes ever again. So I wonder whether that will be the lesson for Labor. Is there something also, though, in this idea that the economy people gave the Conservatives, even though it may have been a bit of a mess under the Conservatives in terms of changes of leadership and everything else, that they had produced

this very long recovery, potentially against the odds. Malcolm again, there was something to that. And they also restored the budget to surplus. Now in Australia, that's a big deal. People want the budget insurplus. The former Labor government had taken it into deficit in the response to the financial crisis. They promised to return it to surplus time and time

again and never got there. Now the Coalition came into power a few years ago and they've restored some some kurds on spending and bit by bit they've been able

to increase revenue. But Josh Feinberg, the Treasurer, just leading to the election, was able to declare that yes, after a decade of deficits budget surfaces are back and that really boosted the traditional view of the Liberal National Coalition as strong on the economy, Tamara, if you're an economy wanting to know how to have an endless recovery and no recessions, is there anything to learn from Australia or are they just in the right place at the right time,

you know, so dependent on the Chinese economy when China was strong and the rest of the world was weak, but then also with their own domestic growth as well well. They have a couple of factors. They've got some shock absorbers, and one is the currency. It tends to be very responsive to global global demand conditions or commodity prices. And yes, they've actually got become much more linked to Asia and especially the Chinese Chinese economy and when China stimulating their economy,

there there are knock on factors for Australia. But also this is a domestic demand economy, so that factors in greatly. And and during some of the times when when the rest of the world have been in a slump, Australia has happened to have a situation where the household spending has been in the right place, or even investment has

been in the right in the right spot. So remember we had that mining investment boom going on as well just after the global financial crisis more recently, And Malcolm, what does it mean does the election have any big impact on economic policy in the short term. I guess there's you're not going to have all of those proposals from the Labor Party being implemented. But that's exactly the

chief the chief difference. That's a removal of risk. You know, some of the economists had been worried Laby was going to revoke some of the concessions for tech for investment in property, right at the time that property is struggling, that we're going to add new taxes on the carbon emissions, right at the time that there is struggles to get sufficient baseline baseload power to Australia's cities, and the tax and spend dynamic of labor was was a bit of

a threat to the continued growth. It was a threat that they justified on the grounds of fairness. But the removal of that means a status quo, and you know economies and economists often like the status quot. H Well, I think the lesson for other parts of the world is, if you want to have a really long recovery, be next to China, and if and if you're going to have a debt fueled housing bubble, try not to have it burst the same time as everybody else. Australia now

has its crisis. I suspect it will be much less serious because it's not happening at the same time around the world. I'm joined now by Federal Reserve reporter Chris Condon to talk about something completely different but possibly more portent to many of the people listening, which is the US Central Bank, the Federal Reserves review of how it

goes about its work. Because there's a there's a big conference coming up which if you just looked at the program, it would be one for the nerds, but actually we we we should really care about this? Is that right? Absolutely? You know, it's a big academic style conference in Chicago.

It's really part of a year long process. The FED in particular is examining its mandate from Congress to keep prices low and stable, and they're thinking about how do we interpret that and how do we go about trying to fulfill that mandate At the moment, of course, you know that since two thousand and twelve they've had an explicit two percent inflation target, but you know, inflation has

been low. They've failed to meet that target. For ever since they've had that target, that's been below two percent UM. So they're trying to think of what should we do to lift inflation um And there are a number of ideas, and some of them are quite technical, but quite controversial, i have to say. And already even before this big conference, they're running into some serious pushback from the PhD community about whether or not the biggest economy in the world

should be experimenting essentially with its inflation target. Well, it's interesting you say that. Of course, we're all quake at the thought of the PhD community being against us. I'm roobly glad that they're not against me, but what kind of thing are they looking at? I mean, why is it?

It does obviously seem odd to have we think of central banks as being dedicated to fighting inflation, but as you say, they've kind of got to get their head around the fact that they haven't been producing enough of it. And actually the US has been a bit more successful at that than countries like the central banks, like the European Central Bank in the last few years. But what kind of options could they be looking at? And someone was talking to me about maybe having a price level

target or having an average inflation target. I guess those things are quite hard to explain to people, But why would they work better? Well, mostly I think we can. We can put them into a category that we can

call makeup strategies. So at the moment, when they say they want to hit two percent inflation target, that means if it's below two percent, they want to push it back up um And no matter how long it's been below two percent, if it that then subsequently goes above two percent, they want to immediately push it back down to two. So they're always aiming to bring it closer to that target. Now they've been under it for so long. They're worried that that becomes ingrained in the way households

and businesses react. In other words, that they think people will expect it to continue to be below and that

that will worsen the problem. So one of the several actually of these proposals, um would have the FED, after a period of under shooting persistently for a while, what would have them aim to deliberately overshoot so that kind of over a longer period, inflation would average around two and that would keep the expectations of people, whether it's individuals or people running companies, keeping their expectations for inflation in the future to still be around two percent, rather

than deteriorating over time, which they're very much worried about right now. I guess the question is, if you've already failed to achieve one target and you're gonna effectively trying to raise it and then say no, really, this time we're going to get We're gonna going to live even more inflation than we did before. Is that going to be credible to people? Is going to is an extremely

good question. Really, it comes up all the time. If they can't hit two percent, how can they hit two and a quarter or two and a half, you know. I think it it comes down to their resolve inflation. As economists like to say always in everywhere a monetary phenomenon, the one thing that central banks ought to really be able to do is push around inflation. I think it takes a little bit more resolved in and and also

the freedom that a new strategy would give them. Um, with the target set as it is now, I think there's always worry that there would be some um political reaction if they were seen to be letting it run, you know, reacting when it's rising towards two percent in a way that's allowing it to go beyond that. If they sold the strategy beforehand and then followed through with that, perhaps it would be a little braver about actually essentially

letting it rise. As unemployed, as you know, is quite low. If they just don't react to any um initial rise in inflation heading as it heads back to two percent, and then let it go, perhaps they'll they'll be a little bit more successful. But recently, of course, they've they've they've they've stuck with their old instincts to keep ahead of it and try to cap it at two percent, and that's only resulted in them being below You'll be going alone. You'll you'll keep us informed. I will be

several of us will be going off to Chicago. UM. And you know, if I could just add, it does reveal both in the political field and within economists. I think it reveals an interesting generational split. UM. A lot of folks who are old enough, who lived as adults through the very high period, the great inflation of the seventies and eighties, still think quite fearfully about what will happen with inflation if the FED doesn't very aggressively fight

back against any incipient rise in inflation. You see that when J. Powel goes to Capitol Hill and some of the older lawmakers, UM kind of give a shot across the bow when he starts talking about re examining the inflation target. And you see it also among PhD s. You know, the one guy at the FED who's most pushing for a rethink about this is John Williams, one of the younger members of the Federal Open Market Committee. So I think that's also an interesting revealing aspect of

all of this debate. Well, we are we are all creatures of the times in which we grew up, but hopefully not in our clothing ring, return of Flair trousers and god knows what count music. Chris, thank you very much. I am sure we will return to this topic. I'm sure my pleasure. Thanks for listening to Stephanomics. We'll be back next week with more on the ground insights into the global economy. In the meantime, you can find us on the Bloomberg Terminal, website, app or wherever you get

your podcast. We'd love it if you took the time to rate and review our show so can reach more listeners. For more news and analysis from Bloomberg Economics, follow as Economics. It's simple on Twitter, and you could also find me on at my Stephanomics. The story in this episode was reported and written by Chris Burke, was produced by Magnus Hendrickson and edited by Malcolm Scott and Scott Lamman, who is also the executive producer of Stephanomics Special. Thanks to

Tomorrow Henderson, Chris Condon, and Malcolm Scott. Francesca Levy is the head of Bloomberg Podcast